Employment Policy and Real Wages

Abstract

Unemployment seems to be a fact of life in many countries, perhaps especially characteristic of the European experience in the present decade. Blame is sometimes cast on a rigidity in wage structures promoted by strong trade union or special interest group pressures. This paper is concerned not with the broad questions of policy which such a situation raises, but rather with the possible relationship between changes in the level of employment and the change in nominal and real wage rates which public policy might dictate. The distinction between those commodities which are traded on world markets and those which have purely national scope is important, since I shall consider the case of a country too small to affect the prices of traded goods (and with a commitment not to change the exchange rate). Prices for nontradeables may be sticky or controlled. Alternatively, the non-traded goods market may be cleared via price adjustments, and this price change may affect the unemployment problem. The major question to be analyzed concerns the spillover effects of market-induced price changes for non-tradeables on the relationship between employment levels and wage rates, either nominal or real. Suppose employment levels are discouraged by a deliberate rise in nominal wages. Will the consequent alteration in the price of non-tradeables ease or exacerbate the problem of lowered employment? Is the answer to this question dependent upon the direction in which the price of non-tradeables moves?